The Basics: Finance

Partial insurance, 180–1;
Standard insurance, 180
Risk references, 157–8
Use of derivatives and
insurance, 152–7; Risk
management, 152–5;
Speculation and arbitrage,
155–7
Direct placement, 126
Discount rate, 232–3
Disintermediation, 221
Diversifiable risk, 54–6
Divestiture, 195–6
Dividends, 81–2, 89
Earnings before interest and taxes,
32
Efficient market hypothesis, 135
Electronic communications
networks, 101, 238
Enterprise value, 4–5
Maximization of, 58–9
Equity, 24
Eurobonds, 123
Eurocommercial paper, 121–2
European option, 167
Euro medium term notes, 124
Exchange-traded derivatives, 171–
5
Exchange traded funds, 146–7
Exclusions, 178
Expected future return, 52–3
Expected value, 52–3
Finance, introduction to, 3–16
Definition and scope, 3–4
Financial process, 12–15;
Financial decisions, 14–15;
Financial planning, 13–14;
Financial reporting/
analysis, 12–13
Goals of, 4–12; Managing
liquidity and solvency, 8–
10; Managing risk, 10–12;
Maximizing profits, 5–8
Internal and external factors,
15–16
Financial participants, 207–24
Complete picture, 219–21
Forces of disintermediation,
221–3
Key participants, 208–19; End-
users, 214–17;
Intermediaries, 208–14;
Regulators, 217–19
Role of participants, 207–8
Financial risk, 11
The global financial markets
246
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Financial statements, 21–47
Financial ratios, 36–41;
Liquidity ratios, 39–40;
Profitability ratios, 37–39;
Solvency ratios, 40–1
Financial reporting, 21–2
Financial statements and
decisions, 43–6
Key financial statements, 22–
36; Balance sheet 24–30;
Income statement, 31–3;
Statement of cash flows,
33–6
Financial tools and concepts, 48–
76
Essential tools, 60–75; General
cost of capital, 60–64;
Investment decisions, 70–4;
Time value of money, 65–
70
External forces and financial
decisions, 74–5
Risk considerations, 48–59;
Enterprise value
maximization, 58–9; Risk
diversification, 54–8; Risk
versus return, 49–54
Financing cash flows, 34
Fiscal policy, 235
Fixed charge, 106
Foreign exchange market, 226
Forwards, 162–64
Fund of funds, 144
Future value, 65, 69–70
Futures, 173–4
Futures options, 173–4
Generally Accepted Accounting
Principles, 22
Global financial markets, 225–41
Dynamic marketplace, 235–41
Macro-structure, 225–31
Monetary policy and financial
variables, 231–5
Goodwill, 27
Gross domestic product, 229
Gross margin, 38
Gross profit, 31
Gross revenues, 31
Hedge funds, 143–6
Hedging, 11
High yield bonds, 123
Horizontal integration, 189
Income statement, 13, 31–3
Indexing, 136
Inflation, 228–9
Initial public offering, 81
Insurance, 11, 175–83
Insurance company, 213
Intangibles, 26
Interest cover, 41
Interest rates, 60
Internal rate of return, 72
International Financial Reporting
Standards, 22
Investing, 7
Investing cash flows, 33–4
Investment bank, 212
Investment funds, 132–51
Instrument characteristics,
136–47; Key characteristics,
137–9; Key fund classes,
139–47
Issuing, redeeming, and
trading, 147–50
Portfolio diversification, 134–6
Uses of investment funds, 132–
4
Investments, 25–6
Leases, 124
Legal rights, 81
Leveraged buyout, 186, 192–5
Leveraged lease, 125
Liabilities, 24
Limited liability, 80
Liquidity, 8, 44–5
Loans and bonds, 103–31
Borrowing, issuing, and
secondary trading, 125–30
The global financial markets
247
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Borrowing costs, 109–16
Financial leverage, 107
Instrument characteristics,
116–25
Uses of loans and bonds, 103–7
London Interbank Offered Rate,
60–1
Macro-finance, 207
Market efficiency, 135–6
Medium/long-term debt, 27
Medium/long-term loans, 124
Medium term notes, 123
Mergers, 186, 192
Monetary policy, 231–5
Money markets, 226
Monopoly, 192
Mortgage-backed securities, 125
Negative equity, 24
Net asset value, 144
Net income, 31
Net margin, 38–9
Net present value, 70–4
Non-diversifiable risk, 54–6
Normal distribution, 52
Off balance sheet accounts, 27–8
Oligopoly, 192
Open-end funds, 139–42
Open market operations, 233
Operating cash flows, 33
Operating income, 31
Operating lease, 124
Operating margin, 38
Operating risk, 10–11
Options, 167
Over-the-counter derivatives,
161–71